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Strong UK wage data on Tuesday pushed short-term gilt yields to above the level reached during the turmoil following Liz Truss’s “mini” Budget last autumn, as investors bet that interest rates would climb further.
Wage growth accelerated in the three months to April to levels far above where the Bank of England thinks is consistent with bringing inflation back to its 2 per cent target.
Two-year gilt yields rose 0.23 percentage point to 4.86 per cent, compared with their peak of 4.64 per cent in the aftermath of the announcement of unfunded tax cuts in the “mini” Budget in late September. Yields on gilts with longer maturities have not exceeded last autumn’s levels.
The pound gained 0.4 per cent in early trade, rising to $1.256.
The Office for National Statistics said average private sector wages, excluding bonuses, were 7.6 per cent higher than a year earlier over the three months, the fastest pace of growth on record outside the coronavirus period. Average public sector wages were 5.6 per cent higher.
Across all employees, annual growth in total pay, including bonuses, picked up pace to 6.5 per cent, significantly faster than the 6.1 per cent figure analysts had expected.
The strong wage data compounds the high inflation data for April of 8.7 per cent, which suggested UK inflation was returning to normal levels much slower than the BoE predicted.
“If there was still any doubt about the direction of monetary policy, these data should solidify another interest rate increase from the bank of England next week and probably more in the coming months,” said Yael Selfin, chief economist at KPMG.
Markets expect the BoE’s interest rate to rise from the current 4.5 per cent to 5.5 per cent by the end of this year, pushing up borrowing costs for the government and mortgage holders, for whom fixed-rate deals have been withdrawn by lenders.
Megan Greene, who will join the BoE’s Monetary Policy Committee in July, told MPs on Tuesday that she thought high inflation was now driving wages higher. “There are second round effects that seem to be seeping in,” she told the Treasury Committee of the House of Commons.
While she did not say how she would vote in her first MPC meeting in August, Greene said the BoE was right to have raised rates in May, something that Silvana Tenreyro, who she is replacing on the committee, voted against.
“I think there is some underlying persistence [to inflation] and so getting from 10 per cent to 5 per cent… is probably easier than getting from 5 per cent to 2 per cent,” she added.
Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said wage growth had “far too much momentum” for the monetary policy committee to stop raising rates. Although analysts had expected April’s increase in the statutory minimum wage to cause a one-off bump in pay, he noted, the data showed wage growth was being driven primarily by higher-paying sectors such as finance and manufacturing and could therefore be expected to continue at a similar pace.
Although hiring has slowed sharply over the past year — with the ONS data showing a further fall in the number of vacancies — the data contained few other signs of weakness. A previous drop in the number of payrolled employees was revised away. The ONS said the unemployment rate averaged 3.8 per cent in the three months to April, up from 3.7 per cent in the previous quarter but down from last month.
Meanwhile, the number of people in employment rose to a record high, although the employment rate, at 76 per cent, remains below its pre-pandemic level. The share of UK adults choosing not to work or job hunt remains higher than before the pandemic, with no further drop in the rate of economic inactivity in the last month, although it has fallen 0.4 percentage points from the previous quarter to 21 per cent.
This article has been amended to correct the peak two-year gilt yield in the wake of the “mini” Budget
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